Guest Post by Joshua Eke
Finding adequate funding for your business is imperative whether you're just staring out, looking to expand, or wanting to make the most of a new product or service launch. Obtaining that funding, however, can seem like an overwhelming challenge - especially if you want to avoid crippling fees and finance charges.
Look to Alternative Funding Methods When You're Business Needs Capital
Trying to work with traditional lenders to increase business capital can feel more like hitting a brick wall. Fortunately, alternative funding methods have blossomed since the economic downturn nearly a decade ago.
We invite you to explore the following alternative funding methods the next time your business is in the market for excess capital.
Finance Your Equipment & Vehicles
Frugal business owners are often wary of leasing things and with good reason - who wants another bill to pay each month? However, leasing can free up significant cash that would be tied up in a purchase otherwise. It's a smart way to try a wider range of equipment as your employees determine what works best for your growing business.
Also, when you lease equipment, the company has access to newer and better functioning models. This can wind up saving you money if the alternative is using larger stores of cash to purchase older, more affordable equipment. In the latter case, less efficient equipment performance, as well as higher maintenance and repair costs, can wind up costing you more than leasing new equipment.
An added bonus? Leasing helps your company build a solid credit reputation, which is essential if you opt to go the traditional small business loan route in the future.
There are plenty of other successful business owners out there who have been where you are today. Often, as a way of giving back, they look for lending opportunities that allow them to support a fellow small business owner while making a small profit.
These peer-to-peer loans are more personal, will typically carry much smaller percentage rates than a traditional loan, and your lending terms can be customized to suit your needs or revenue cycles.Peer-to-peer lending can also come in the form of financing from customers, family members or friends. If this is the case, your "lenders" may expect certain discounts or freebies as an added bonus, which may or may not be a problem.
Think about a "peer lending rewards program" that makes sense for your business. A written contract with clear terminology is always a smart idea - think business with heart - so healthy relationships remain intact.
Tapping Retirement Funds
Your retirement is your future, so only use this method after having a detailed conversation with an experienced, certified financial planner or CPA. That being said, tapping your retirement funds can be a successful way to loan money to yourself.
If your business model is sound and your plans play out as anticipated, your retirement funds will be replenished - and then some - as a result of your new business success.
Currently, in the government's efforts to support small business owners and entrepreneurs, ERISA laws state that existing IRA and/or 401(k) plans can be invested in the purchasing of a new business without any early distribution penalties or fees. You can then combine these funds with other funding methods to attain your target capital goal.
Factoring, which is also called accounts receivable funding, is another way to gain instant liquidity, based on current accounts. If you go this route, make sure you select a reputable factoring company who is established in the industry.
With this method, business owners "sell" their accounts receivable to the factoring company. The factoring company then advances a certain portion of that amount back to the business. In most case, you can obtain upwards of 75% or 80% of your total accounts receivable sales, while the remaining amount is held as the "reserve."
The reserve, the fee (typically an initial percentage of the total amount for the first 30-days and then a set percentage rate after that), is held back until the accounts are paid, at which point the difference between the amount borrowed and the reserve is paid back to the borrower.
The reserve percentage, fees and interest rates are typically set according to the quality of the receivers and the history of the payers. If you have a fair share of late payers your funding terms will reflect that.
Factoring is a smart way to get access to quick cash (typically within 10- to 14-days). It is used often by growing businesses, as well as businesses who have a more seasonal cash flow and/or who use factoring to meet payroll obligations in a timely manner.
Successful Business Owners Think Beyond Traditional Solutions
Don't let traditional lending constraints hold you back from entrepreneurial or small business success.
About the AuthorJoshua Eke is the Business Development Representative at Factor Funding Co. They increase cash flow for small businesses by providing accounts receivable factoring, asset based loans, equipment financing and other ancillary services.
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